The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, traded slightly lower last week. That could signal lingering controversy and risk surrounding the long oil trade.
However, declining inventories could be a bullish catalyst that encourages more traders to revisit oil from the long side.
While the Organization of Petroleum Exporting Countries are skeptical that demand growth can put a dent into the ongoing supply glut, the oil cartel has made steps to cut down supply to bolster prices. OPEC has already promised to curb production by 1.2 million barrels per day between January this year and March 2018.
“More importantly, there is growing evidence to suggest that the inventory drawdowns will continue and might even accelerate. That evidence can be found in the futures market, where changes in longer-dated contracts are no longer trading at a much higher price than near-term prices,” reports OilPrice.com.
Geopolitical unrest in Venezuela have recently helped oil’s cause. Venezuela is Latin America’s largest oil producer, but that production is continually sliding because of the government’s heavy hand in the oil business and its refusal over the years to make the necessary infrastructure investments to make oil production there more economical.
“Crude Oil Production in Venezuela decreased to 2156 BBL/D/1K in June from 2189 BBL/D/1K in May of 2017. Crude Oil Production in Venezuela averaged 2423.92 BBL/D/1K from 1973 until 2017, reaching an all time high of 3453 BBL/D/1K in December of 1997 and a record low of 594 BBL/D/1K in January of 2003,” according to Trading Economics.
Related: Venezuela Political Volatility: A Catalyst for Oil?
USO is often afflicted by contango, but there is evidence that situation is abating. Contango occurs when the price on a futures contract is higher than the expected future spot price, which creates the upward sloping curve on future commodity prices over time. Essentially, the phenomenon reflects a current spot price that is lower than the futures price.
“Now, things are changing. The contango has narrowed significantly, to the point of virtually disappearing. Which is to say, oil contracts for near-term delivery are priced just about the same as contracts six months ahead,” according to OilPrice.com.
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